How the Value of the British Pound Impacts Forex Trading

December 16, 2021

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The foreign exchange (forex) market is one of the most actively traded markets in the world and allows investors access to global currencies.

There are a multitude of factors that can affect the value of any given currency, and the volatility of the market. These include economic growth, international trade and relationship, and macroeconomic data, such as changes in interest rates.

The fluctuations in the market, and its liquidity, provides investors with potential opportunities to profit — although does involve a level of risk.

One of the most commonly traded currencies is the Great British Pound (GBP). In this article, we explore the most recent factors that impacted the currency’s value, how this compares from month to month, and the effects on forex trading online.

Factor 1 for Forex Trading: The UK Economy

On 29^th September 2021, the British Pound hit its lowest level since mid-pandemic in 2020. It dropped below £1.35 in comparison to the US Dollar. This was believed to be a direct impact of the health of the UK economy at the time, which was suffering from the economic term ‘stagflation’ — a combination of stagnant and inflation.

Stagflation is one of the worst events that an economy, and the forex market, can experience. It consists of high unemployment rates, slow economic growth and high inflation. Just one month before, in August 2021, the inflation rate sharply increased from 2% to 3.2%, whilst the nation’s consumer price index (CPI) was at its highest level.

Over the month, and continuing into October, the currency witnessed high volatility, fluctuating between the lowest levels of September, to a high of £1.3799. It’s believed the market was reflective of the uncertainty surrounding the Bank of England’s (BoE) decision on future interest rates.

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Factor 2 for Forex Trading: Bank of England interest rate decision

On November 4^th, the currency pair GBP/USD was 0.4% lower, after experiencing significant fluctuations and ahead of the BoE monetary policy decisions — the results of which saw interest rates maintained.

The Monetary Policy Committee (MPC) made this decision based on the supply crisis being felt across the world, and the idea it was not necessarily a demand pressure in the UK economy. Therefore, raising interest rates in November would not be a complete solution.

The rates remain at the level decided in March 2020, which were originally in response to the pandemic and a record-low of 0.1%. However, there’s the possibility of future increases in the coming months to respond to high inflation.

The decision was also based on the job market, and the fact that sufficient data is needed to analyse the aftermath of the furlough scheme ending. There were roughly one million workers formerly on the scheme in the UK. Therefore, it is likely that there will be considerable effects to the job situation of those one million, which will be reflected in a survey carried out by the Office for National Statistics (ONS).

From July to September, the ONS recorded an unemployment rate of 4.3%. The BoE policymakers will await to see the data for the most recent months, as will forex traders.

With regards to the financial markets, the predictions of most investors involved a rate rise, therefore the pound fell by roughly 1% against the dollar to 1.35 — levels previously seen back in September 2021.

The overall economy was expected to recover fully by the end of 2021. But with recent events, it’s now believed that the economy will not bounce back to pre-pandemic levels until the start of 2022.

Observe these Factors closely when Forex Trading with the British Pound

When it comes to forex trading, it is always best to conduct extensive research, to ensure your trading decisions are well-informed. This will involve close monitoring of the data that can impact the health of the economy, such as interest rates.

If you are considering opening a position on the forex market, and trading with the British Pound, then you should take into consideration the outcome and aftermath of the monetary policy decisions made by the BoE.